Dark Side of Brazil’s Rise

The abundance of (foreign) cash has helped fund riskier bank loans in Brazil and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world’s most overvalued currency, and many local factories aren’t competitive in global markets.

Daily life has become so expensive that movies, taxis and even a can of Coke cost more in São Paulo than in New York. Rio de Janeiro apartment prices have doubled since 2008, and office space in São Paulo is suddenly more expensive than Manhattan. In many cases, investment banks must pay their Brazilian bankers and analysts more than they would get doing the same job in New York.

“Ever since I was a little girl I always heard Brazil was the country of the future. Now that the future is here, I am starting to fear it will be brief,” said Cynthia Benedetto, the chief financial officer of Brazil’s flagship manufacturing firm, Embraer SA, the world’s No. 3 jet maker.

Learning to manage abundance is an unusual situation for Brazil, which historically struggled to attract investment flows as it wobbled between currency crashes and economic crises. But capital that floods into a country can flood out of it. Leaders in emerging economies are concerned that a financial catastrophe in the developed world—such as sovereign defaults in Europe—could cause a sudden reversal of investment flows. That would prompt jarring falls in currency, real estate and other prices that have soared in places like Brazil during the boom.

Armed with a strong currency and cheap financing, a new class of Brazilian jet setters are getting on planes and shopping like mad in countries where goods are cheaper. Brazilians spent $8.5 billion on overseas shopping sprees this year—60% more than last year.

The cash inflows have heated up the Brazilian real-estate market as well. A slew of Brazilian home builders such as Gafisa SA and Cyrela SA raised hundreds of millions of dollars in share sales in recent years, mainly to U.S. investors. The money helps them build homes for Brazil’s emerging middle class—a good thing. But cash-rich home builders have bid up the prices of available land in big cities, causing a spike in home prices, according to Sergio Freire, chief executive of real-estate brokerage Brasil Brokers.

Credit bubbles are another concern. The collapse of Maura Guarnieri’s personal credit bubble in São Paulo illustrates the case. A working mother of two, Ms. Guarnieri started loading up on debt last year after her husband’s kidneys failed and he stopped working. Soon, she had taken out four credit lines at interest rates over 40%—far more than she could pay each month. Recently, she defaulted on some of the loans, adding to a 20% rise in consumer-loan defaults in Brazil so far this year.